[Hrishikesh Goswami and Nisarg Viradia are third year B.Sc. L.L.B. students at Gujarat National Law University, Gandhinagar]
The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations), introduced by the Securities and Exchange Board of India (SEBI), play a pivotal role in ensuring transparency, accountability, and investor protection in the Indian securities market. These regulations were conceived with the objective of improving disclosure standards, promoting corporate governance, and ensuring that the markets remain fair and efficient for investors. In furtherance of the same objective, on June 14, 2023, SEBI introduced an amendment to tackle the newly emerging challenges and strengthen the existing legislature further. Broadly, the amendment has introduced new information that is required to be disclosed and stringent timelines for such disclosures. Equipped with a quantitative threshold for determining the materiality of events that are required to be disclosed, they aim to reduce the ambiguity surrounding the obligation to disclose the events enshrined within Schedule I of the said regulations. The present article examines the key changes brought about by the amendment and aims to analyse how it constitutes a significant yet somewhat imperfect step towards achieving balance in the skewed relationship between investors and listed entities.
A DEEP DIVE INTO THE AMENDMENTS:
‘Disclosure of events and information’ in the LODR Regulations functions on the basis of ‘materiality of events/information’, identification of which is to be done in light of Regulation 30 (4) (i) and (ii). For a layman, ‘material information’ represents ‘information that a rational investor would consider to be relevant while making an investment decision.’ Disclosures are to be made in strict accordance with the threshold laid out under Sub-Regulation 4 of Regulation 30.
I. Prescribed quantitative materiality thresholds
Compared to the pre-existing regulations, the June 2023 amendments, introduced quantitative thresholds for material events to Regulation 30(4)(i)(c), which shall include events whose impact on value exceeds 2% of turnover or 2% of net worth (according to the most recent audited consolidated financial statements, except when there’s a negative arithmetic net worth); or 5% of the post tax average value of either profit or loss incurred by the entity as can be observed from its last three audited financial statements.
Another salient feature of the amendment requires the examination of continuing events on the touchstone of ‘materiality standards’, which are then to be disclosed within 30 days from the notification of the amendment. The board of directors of a listed entity now must appoint ‘Key Managerial Personnel’ (KMPs) to be responsible for determining the materiality of an event and to expedite disclosures to stock exchanges, whose names are to be disclosed to stock exchanges and listed on the company’s website. Further, the amendment strengthens the internal regulation of listed entities by mandating the publicity of the entity’s materiality policy among its employees and the requirement of a reporting mechanism within the organization, allowing disclosures to be aided by the findings of every employee of the organization. Effective regulation requires an all-encompassing framework in place; however, it also requires a mechanism that prevents such a framework from being altered at the whims and fancies of the board of directors of entities subjected to regulation, an area that these amendments have significantly addressed. The amendment has also introduced safeguards to prevent the dilution of the materiality policy by the listed entities. sSuch quantitative thresholds provide an objective measure to be followed by listed entities and facilitate easier compliance.
II. Streamlined timelines for disclosure
For quantitative thresholds to be actionable, there must be clarity in the timelines to be adhered to for such disclosures. In the past, the LODR lacked consolidated timelines for disclosures to stock exchanges, and such standards were mentioned in bits and pieces throughout the body of the regulations, in the range from Regulation 30(6) to Schedule III. Regulation 30(6) under the amended regulations, while focusing on the need to make disclosure of ‘material events’ ‘as soon as reasonably possible’, consolidates these timelines under a single provision. To strengthen these standards, the regulations specify the upper limits for such time periods: -
“i. 30 minutes post the conclusion of the board meeting at which decisions pertaining to the event/information were made;
ii. 12 hours following the occurrence of the event/information, if the event/information is emanating from within the listed entity; and
iii. 24 hours following the occurrence of the event/information, if the event/information is not emanating from within the listed entity.”
While enhancing the existing regime for disclosure of material events, the focus on enhancing transparency within listed entities is evident through the need for the listed entity to disclose the schedule as well as all presentations made in meetings of analysts’ or institutional investors’ at least 2 days in advance on their website.
III. Changes in reporting and disclosure requirements
Remarkably, the new regime addresses a wide gamut of sectors, extending all the way from cybersecurity and data privacy incidents to ESG (Environmental, Societal and Governance) based disclosures. The listed entities are also required to disclose any communications from regulatory, statutory, or judicial authorities (in their Annual Reports for fiscal years 2023–24) as well as frauds, defaults, or arrests of directors or senior management personnel of the parent company or its subsidiaries in accordance with Regulation 16(d). The amendments, for the sake of clarity, have aligned the definition of ‘fraud’ with the one enshrined under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, and that of ‘default’ has been held to be ‘the non-payment of interest on the principal in full on the date when such repayment of a debt is due.’
Mandatory disclosure items under the regulations (housed in Part A of Schedule III) now also include the need to disclose agreements entered into by shareholders, promoters, or promoter groups, among others within themselves, with the listed entity, or with any other party that has the potential to impact the management or control of the listed entity. Further, changes in personnel in the management of the entity are also included in the amended Part A of Schedule III, including the resignation of senior management, directors, compliance officers, and key management personnel, which are to be disclosed to the stock exchanges with their resignation letters. The materiality standards now include disclosure of pending disputes or proceedings before judicial, regulatory or enforcement authorities, delays in payment of fines, penalties, dues, etc.
IV. Top listed entities to address market rumours
While such alterations to the regulations indicate a strengthening of regulatory oversight of listed entities, the amendment also made a striking change to disclosure standards. In today’s world wherein media influences our daily behaviour, including our investment choices, the LODR requires the top listed entities (top 100 from October 1, 2023, to April 1, 2024) to address market rumours published in mainstream media (which have been defined to include print, news channels, and electronic newspapers permitted by law) by either confirming, denying, or issuing clarification about them, while also providing updates on such events, that too within 24 hours of such reporting.
The LODR amendment, in spirit, reflects a great stride in furtherance of the object of the regulations. It is evident that corporate governance, accountability, and transparency form the soul of the amendment. While this amendment appears to have a great intention of diminishing the anonymity that veils the actions of any corporate body and identifying the rights of shareholders to know what the actual modus operandi of a company is, it may have skewed the balance between the corporates and the shareholders slightly towards the latter.
While it is essential to preserve such rights for the shareholder, they should not come at the cost of the efficiency of the operation of a company. The present amendment would not only increase the costs faced by the company to comply with the new regulations, but it would also burden the employees as they would have to consolidate and publish the information in a very short frame of time, as most of the provisions came into effect within 30 days of the notification, and some had immediate effect. In a digital world flooded with various news publishers, tracking every piece of news surrounding a company would prove to be an extremely tedious and cost-intensive task. It would also wean off the total profits earned by entities in industries whose sale depends upon the development of products in secrecy and their introduction into the market after they have been tested several times. Further, the regulations fail to identify what “general in nature” (the criteria included in the amended regulations to identify rumours which are to be addressed by listed entities) would include with respect to the rumours, ultimately leaving it to the judicial authorities’ will to interpret it, making the law ambiguous in nature
Further, newly listed companies that are already burdened with complying with existing laws may be deterred from listing themselves all together if such regulations are introduced.
The present amendment and the way all the laws of different domains are evolving, including Labour, metrology, etc., follow a common path: an increase in the costs of compliance and governance.
Ultimately, amendments modifying the regulations to keep pace with the current world are vital, and those strengthening the rights of stakeholders and the people at large are welcome, but a more balanced approach is required to be taken.